I’m the head of the Corporate Market for the Tax & Accounting business at Thomson Reuters – we build the corporate tax software used by many of the world's largest multinationals, as well as the Big 4 accounting firms. I work closely with global business leaders to set up their tax technology, so I have visibility into how they handle financial reporting and the challenges they face. I also serve on the board of a growing medical technology startup. In this blog, I analyze the connections between economics and business opportunities, highlighting examples of where tax helps or hinders growth. Follow the brand @YourONESOURCE.

This week’s Supreme Court ruling against Internet TV start-up Aereo has shone a spotlight on the continued tension between innovation and regulation. With its judgment, the nation’s highest court dealt a potentially fatal blow to Aereo, rendering its method of broadcasting television programming over the Internet a violation of copyright law. This constant strain between technologies that disrupt the status quo and regulations designed to level the playing field is becoming a huge issue for businesses.

The topic gets a lot of attention in the consumer space. In fact, I’ve written quite a bit about it in previous posts on companies including Tesla, Uber and Airbnb. But the tenuous relationship between innovation and regulation also is becoming a focal point in the professional services space. I was introduced to several examples where disrupters are pushing current regulatory structures to their limits at a recent Stanford Law School CodeX event.

Organized by the school’s Center for Legal Informatics, the event was focused on advancing the thinking on how technology applies to the practice of law. It featured a panel of CEOs from legal industry technology companies and start-ups creating solutions that will change the delivery dynamics of the legal industry, ultimately bringing down costs and extending services to more people.

Examples included firms targeting Big Data analytics to help lawyers conduct e-discovery, specialty IP research firms that help corporate counsel conduct prior art searches and trademark monitoring activities, and consumer self-help services like LegalZoom and Rocket Lawyer that let consumers create their own legal documents based on templates and best practices for a flat fee via the Internet.

These types of services are thriving, of course, because they address a palpable fear that’s growing in the legal industry. Partners at big law firms are making less money. According to the Thomson Reuters Peer Monitor, 2013 was another flat year for economic growth in law firms, with continuing sluggish demand and ongoing client pushback on rate increases.

Karl Florida, my seatmate for the Codex event and managing director overseeing the small law firm business segment at Thomson ReutersThomson Reuters, explained the phenomenon that’s been unfolding for the last several years:

“There’s so much change going on in the legal industry because the legal services business has become tougher in last 5-6 years. A big driver of innovation in the space has come from the fact that the traditional partnership structure of most law firms makes it difficult to reinvest in business, invest in new technologies, etc. As corporate legal departments have become much more demanding on price, firms have had to resort to cutting costs and implementing flat fee billing models, which gives them a new incentive to cut operational costs.”

This trend has given birth to a cottage industry of alternative legal service providers who can perform many of the administrative tasks once performed by large law firms at a much lower cost. As the trend gains momentum, it has the potential to truly revolutionize legal services as we’ve come to know them.

There’s only one problem with all of this. Many of these businesses exist in a legal gray area, which is challenging regulatory authorities and threatening to crimp innovation in the category. Just as Airbnb has found itself at the center of a lawsuit with the New York Attorney General’s office and Aereo brought down the gavel of the Supreme Court, LegalZoom has been sued for “practicing law without a license” in five states.

The central challenge confronting legal industry start-ups is that current regulations put strict definitions on the business structure of legal services firms. Put simply, under current U.S. law, law firms need to be owned by lawyers.

That’s a huge limiting factor when it comes to innovation and the kinds of investments that are required to fund it. In contrast to the consumer technology space, which has been built largely by private equity and venture capital dollars, the legal services industry in the U.S. can accept no such investment.

But that still hasn’t stopped some pioneers from making bets that they’ll be able to skirt regulatory limitations long enough to make an impact on the industry and, potentially, reap huge rewards. Many entrepreneurs in this space point to recent deregulation of the legal industry in the UK and Australia as a sign of things to come in the U.S. In the UK, for example, the Legal Services Act of 2007 allowed the creation of Alternative Business Structures (ABS), which allow legal services firms to be owned by non-lawyers. The move has given birth to – among other things – “MinuteClinic-style” legal services shops in retail establishments owned by the giant Co-operative Brands Limited. The reforms have also caught the eye of the Big 4 accounting firms which are looking at legal services as a potential service line extension.

It’s a theme that we’re going to see more of as the delicate balance between innovation and regulation continues to be put to the test. Will the legal services industry be deregulated in the U.S. as it has in Australia and the UK? What kind of opportunities might that create? Will TargetTarget and CVS become retail hubs for routine legal advice similar to the model they have deployed in healthcare? Will H&R BlockH&R Block & Jackson Hewitt start offering legal advice similar to how they have moved into the health insurance advisory space?

Right now, the innovators are tilting the scales in favor of change. By creating new solutions that establish instant consumer demand, the start-up disrupters are causing regulators and incumbent market leaders to dramatically alter their thinking about conventional business rules of engagement. We’re nowhere near the finish line for identifying the long-term winners and losers, but we are in the midst of a pivotal moment in the evolution of business where – thanks in large part to fears that were ushered in by the financial crisis – new models that challenge everything we thought we knew about business are rapidly becoming the norm.

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